Insider-trading laws are “a little bit murky” and confusing to investment professionals, the lead prosecutor on the Raj Rajaratnam case said during a panel discussion in New York.
“There’s incredible confusion on what is or is not illegal, and it’s a real problem,” Jonathan Streeter, a former Manhattan assistant U.S. attorney now with Dechert LLP, said today at the Bloomberg Hedge Funds Summit. “The law is very complicated and the lines are a little bit murky.”
He said the cases he worked on seemed sufficiently “over the line.”
New York defense lawyers Gerald Shargel and Ira Sorkin joined Streeter on the panel to discuss the government’s insider-trading investigations, which have centered largely on hedge funds since Galleon Group LLC co-founder Rajaratnam was arrested in 2009.
Sorkin, who represented Ponzi schemer Bernard Madoff, said prosecutors and civil enforcement agencies are working more closely than in the past on insider-trading cases, creating a more complicated legal landscape for defendants.
“Today, parallel investigations take place all of the time,” Sorkin said, with each agency “looking for a pound of flesh.”
Along with the case against Rajaratnam, who is serving an 11-year prison sentence, federal prosecutors in Manhattan have brought insider-trading cases against Level Global Investors LP co-founder Anthony Chiasson, former Diamondback Capital Management LLC portfolio manager Todd Newman and former SAC Capital Advisors LP portfolio manager Mathew Martoma, among others, as part of a nationwide crackdown.
All three men have denied wrongdoing.
Chiasson and Newman are on trial in Manhattan federal court. Martoma, who was arrested last month and was also sued by the U.S. Securities and Exchange Commission, is free on bail. The panelists declined to speak about specific cases.
Prosecutors have also brought cases over hedge fund employees’ alleged inappropriate use of so-called expert-network consultants to obtain confidential information. Streeter said there are some uses of consultants that the government would find acceptable.
Using an expert in a drug under development to get a sense of how the product would be used is “totally appropriate, and the government will never question it,” Streeter said. Obtaining information about confidential clinical trials would not be appropriate, he said.
Martoma is accused of using a tip from a consultant about the progress of a clinical trial for an Alzheimer’s drug to help his firm make $276 million.
More than 80 people have been sued by regulators or charged by prosecutors since 2008 for passing or getting inside tips about pharmaceutical, biotechnology or other health-care stocks.